Corporations and financial institutions around the world broadly agree that moving over-the-counter (OTC) derivatives trading to a system of centralised clearing would be an effective means of managing both counterparty risk at an individual level and market-wide systemic risk. However, financials and corporates also have some serious concerns about the ongoing process of market structure reform. Some of these concerns stem from the fact that market participants are uncertain about details of the proposals being considered.
Approximately 80% of survey participants overall cite counterparty risk mitigation as the primary benefit of centralised clearing, a share that approaches 90% among financials. At a broader level, almost 51% of survey participants believe a move to centralised clearing would be effective at mitigating systemic risk. “Financials and corporates agree that the need for centralised clearing is most pressing for credit default swaps, which emerged as a key source of both counterparty and systemic risk during the global financial crisis,” said Greenwich Associates consultant Woody Canaday.
Other concerns involve more informed questions among users of OTC derivatives about how the switch to centralised clearing would impact overall market liquidity and costs, as well as corporates’ ability to effectively hedge risk positions.
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